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Exactly What You Need to Know about Rising Mortgage RatesBy
Tuesday, October 15, 2013
My biggest investments in the last couple years – by far – have been in Florida real estate.
I invested for two reasons... 1) house prices are unbelievably cheap, and 2) mortgage rates are close to all-time record lows.
Yes, prices have crept up, increasing 15% nationally over the last year. And yes, mortgage rates have jumped from 3.5% to 4.3%. But U.S. houses are still incredibly affordable today.
Let me explain...
I'm personally STILL buying U.S. real estate.
I just bought a rental house in Florida a few weeks ago. And I'm currently in negotiations on a bank-owned property there as well.
My point is, buying real estate is what I've been doing with my own money. Low house prices and low mortgage rates might never come together again in my lifetime. And I expect prices have plenty more upside from here…
The current price for the median U.S. house is below $200,000. But my fair value estimate (based on a mortgage rate of 4.5%, house prices, and the median income) is about $257,000 – a 34% gain from here. So there's still PLENTY of upside.
And houses will still be a great deal, even if interest rates go up.
If mortgage rates jump from 4.5% to 6%, fair value for U.S. houses would be around $219,000. As the chart shows, that's still a solid gain of around $27,000 from today's price.
 And I actually expect house prices will go higher than fair value. In short, people have very few good alternatives for their money. You can't live on zero-percent interest.
So a lot of money will work its way into real estate, creating another real estate boom. Real estate tends to go in cycles, with prices rising above and below fair value. Prices fell way below fair value during the bust, and I expect they'll go way above it during the boom.
Of course, I can't guarantee that house prices will overshoot. But I can tell you with confidence that – even with some U.S. housing markets up 25% over the last year – house prices still have plenty of upside potential.
Real estate has a few more good years in front of it. If you find a deal on a high-quality property close to you, don't wait... Make an offer on it! It's what I'm doing with my own money.
Good investing,
Steve
Further Reading:
Read more on why Steve thinks housing is one of the best places for your money here:
Can You Stand Low Interest Rates for the Next 20 Years?
"If your retirement plan is to sit and wait and hope to earn higher interest someday, you have no retirement plan. Because that day might not come..." The Best Way to Profit from the Boom AND Survive the Bust
"I'm predicting a major boom and then a bust... The question is, what investment could do well in both?" Market NotesBAD HEADLINES + GOOD TIMING = BIG GAINS When's the last time you heard good news come out of Europe? It's been a while... And that can be good for European stocks.
In February, we showed you how U.S. stocks actually do better when the economy is lagging. And on Wednesday, we showed you how stock markets can stage huge rallies when things are bleak. Greek stocks are up over 100% in the last 16 months... although the economy is struggling.
Things in Spain aren't much better. Unemployment is over 20%. The country is still digesting losses from the huge 2008 real estate bust. And last week, Spanish lawmakers proposed switching the country's time zone to boost worker productivity. But in spite of a weak economy and harebrained ideas on how to improve it, Spanish stocks are soaring.
You can see the big gains in the one-year chart below. It displays the iShares Spain Fund (EWP), which is a one-click way to invest in Spanish stocks. Shares are up 30% in just the last three months and are nearing a two-year high. If you get your timing right, you can make big gains... even when an economy is in the tank.
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